We are debating whether transferring the proceeds from a house sale from one US account (buyer) to another (familiy member of the seller) might be problematic in a case where the recipient account holder’s name is different from the house owner’s name. Is there anything we should be aware of, or does this have no implications whatsoever?
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1I don't understand who the parties are in this transaction. X (seller) owns the house and sells it to Y (buyer), so Y transfers the sale value to X. X then transfers the proceeds to Z (family member of X)? Or are you saying Y transfers the sale price direct to Z, so the money never passes through X's account?– VickyCommented Jul 29 at 20:57
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Is the sale proceeding "normally" (i.e. buyer wire funds to an escrow account at a title company, title company disburses the money to the seller when contracts are signed)? Or since this is a sale inside the family, are you proceeding more informally? And is that part of what might be "problematic"?– Justin CaveCommented Jul 29 at 21:04
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@Vicky Y would transfer the sale price directly to Z and the money would never pass X‘s account in this case.– Jens Draser-SchiebCommented Jul 30 at 5:48
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@JustinCave The sale would not be within the family, however, the process would be more informal and not done through a title company, but directly from the seller to the buyer.– Jens Draser-SchiebCommented Jul 30 at 5:55
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1OK. Should we address whether an informal non-family sale is potentially problematic? What is the reason that you'd want money to not flow to the seller? That's unusual and there is certainly potential to raise concerns that you are violating tax laws or something of the sort.– Justin CaveCommented Jul 30 at 13:36
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1 Answer
In the US, an arms-length transaction is usually done through an escrow managed by an escrow/title company or attorney.
As part of the paperwork, the buyer and the seller provide "escrow instructions" which tell the escrow agent what to do with the money. From the seller's side that also includes disbursement instructions.
The responsibility for the taxes is on the seller, and the 1099-S will be issued to them. But if the seller gives instructions to transfer the funds somewhere else - the escrow agent might oblige. The seller might be liable for gift taxes though, since it is likely that the amount would be way above the exemption limit.
If this is a private sale with no escrow involved then funneling money to a third party may be interpreted as an attempt to evade taxes, especially if the seller does in fact fail to report the income and the gift in which case the transfer will serve as an evidence of intent of a criminal tax fraud. It may be flagged by the banks as a suspicious transaction, and reported to FinCEN/IRS for investigation.
It may also raise concerns with the buyer since by giving money to a third party they may end up losing their ability to prove that they had in fact paid for the purchase.
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1That last sentence is huge. This is a recipe for disaster. Lack of details from OP indicates to me that this is being done to avoid "something" though it's not clear what. An insufficiently documented transaction is very hard to dispute legally, down the line, if the relationship breaks down. Commented Jul 31 at 13:39